Open Innovation: A New Paradigm for Industrial R&D Presentation to National University Ireland - Galway Henry Chesbrough Center for Open Innovation UC Berkeley November 12, 2009 The Current Paradigm: A Closed Innovation System Science & Technology Base Research Investigations R The Market Development New Products /Services D 2 The Open Innovation Paradigm Other Firm’s Market Licensing Technology Spin-offs Internal Technology Base New Market Current Market External Technology Base Technology Insourcing R D 3 Open Innovation Other firm´s market License, spin out, divest Our new market Internal technology base Internal/external venture handling External technology insourcing External technology base Stolen with pride from Prof Henry Chesbrough UC Berkeley, Open Innovation: Renewing Growth from Industrial R&D, 10th Annual Innovation Convergence, Minneapolis Sept 27, 2004 Our current market 2003: We broke up the fortress … Philips Research,Ronald Wolf, 10/08 Bringing in the right partners – Open innovation > 75 companies and > 7000 people at High Tech Campus Eindhoven Corporate innovators Research institutes Consultancy & services Economic development companies Philips Research,Ronald Wolf, 10/08 6 The expansion of the corporate funnel Insourced Ideas /Technology ODM Spin in Start ups IP insourcing OEM Acquisitions Incubators Spin out Alliances Front – end IP Licensing Development Philips Research,Ronald Wolf, 10/08 Commercialization BP’s challenge in February 2006 • Energy Bioscience looked promising (Senior Executive buy-in) • How do we meld commercial/technology strength with biology/biotech? − The company had no bio-expertise • How to reach out to biology/biotech communities − Not a corporate lab! − Corporate labs too insular – can’t tap broader expertise in a rapidly moving field − Where was the Energy/Bio talent pool anyway? − Not the usual university research programme − BP does many of these and knows strengths/weaknesses − Need to facilitate the development, demonstration, and commercialization of research results 8 Funding for Open and Proprietary Components c UC Berkeley Host Institution s act r t on $35M/yr $50M/yr con tra cts BP Proprietary Component contracts subcontracts Lawrence Berkeley National Laboratory subcontracts University of Illinois Urbana-Champaign ENERGY BIOSCIENCES INSTITUTE (EBI) OPEN RESEARCH Other BP Components $15M/yr contracts Other Entities BP R&T PROPRIETARY RESEARCH 9 Licensing provisions For inventions solely owned by UCB, UIUC and/or LBNL NON-EXCLUSIVE Non-exclusive, royal free (NERF) license in BP’s area of interest, providing: - BP will diligently pursue commercialization - BP will underwrite the patent costs EXCLUSIVE BP may obtain exclusive license rights to sole or joint inventions. - pre-negotiated capped fees - “Bonanza clause” in case of extraordinary commercial success 10 Procter & Gamble • P&G used to be a VERY closed organization – “We invented Not Invented Here” – J. Weedman • P&G financial crisis, in 2000 – – – – Missed a series of quarterly financial estimates Stock market lost confidence in the company Stock price fell by more than half in 4 months! CEO (Jagr) was fired © 2008 Henry Chesbrough 11 P&G’s Stock Price: 8/1998-3/2000 P&G Stock Price 130 120 110 P ric e p e r s h a re 100 90 80 70 60 50 40 9 9 9 9 9 9 9 0 0 0 8 8 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 8 8 8 8 8 8 9 9 9 9 9 99 9 9 99 9 9 99 99 9 9 99 99 99 99 99 99 9 9 99 99 99 99 99 99 99 99 99 99 99 9 9 99 9 9 99 99 9 9 99 99 9 9 00 00 0 0 00 00 0 0 00 /7 1 /1 / 1 5 /1 9 /1 2 /1 6 /1 0 /1 4 /1 /7 /1 1 / 1 /4 /1 8 / 1 /4 /1 8 / 1 /1 /1 5 / 1 9 / 1 3 / 1 7 / 1 0 / 1 4 / 1 /8 /1 2 / 1 /5 /1 9 / 1 /2 /1 6 / 1 0 / 1 4 /1 8 /1 1 /1 5 /1 /9 / 1 3 /1 /6 /2 0 / 2 /3 /2 7 / 2 /2 /2 6 / 2 0 / 2 2 2 / 1 3 3 /1 3 / 3 9 /1 1 0 1 0 / 1 1 0 /2 1 1 / 1 1 1 / 2 1 2 /1 1 2 / 2 1 1 /2 2 2 / 1 3 3 /1 4 4 /1 4 / 2 5 / 1 5 /2 6 / 1 6 / 2 7 7 / 2 8 8 /1 9 9 / 1 9 /3 1 0 / 1 1 0 / 2 1 1 /1 1 1 / 2 1 2 1 2 /2 1 1 / 2 © 2008 Henry Chesbrough 12 Searching for the Root Cause • “We fundamentally had a growth problem. Our current brands were performing well. But we weren’t developing many new brands.” – C. Wynett • To get new brands, P&G needed to open up. • Connect and Develop – SpinBrush, Swiffer, Regenerist © 2008 Henry Chesbrough 13 Example: Proctor & Gamble A.G. Lafley President and CEO P&G “We will acquire 50% of our innovations from outside P&G” Jeff Weedman 28 External Business Development managers Nabil Y. Sakkad SVP, R&D, Global Fabric & Home Care VP, External Business Development “We don’t care where good ideas come from.” “There’s 1.5 Million people in the world who know about my business. I want them on my team” Larry Huston (just retired) 120 Technology Entrepreneurs VP, Knowledge & Innovation, Corporate R&D | 14 P&G Share Price Restored! | 15 The New P&G • Many processes to enable open innovation – Technology scouts – Legal templates for IP, partnering – Investments in Innovation Intermediaries • The Goal Now: Become the open innovation partner of choice © 2008 Henry Chesbrough 16 Not Just for High Tech: Procter & Gamble Other Firm’s Market “Use it or Lose it” New Market Internal Technology Base External Technology Base Technology Scouts R Current Market Venture Acquisitions “Spinbrush” D Large Acquisitions “Gillette” 17 An Iberian Example: El Bulli • Ferran Adria studies molecular gastronomy, working with Herve This, a French physical chemist • Adria brings this to El Bulli, restaurant is the Lab • Adria launches many business experiments • Borges: oils, snacks • Lavassa: coffee • N H Hoteles: FastGood, Nhube • Iberian Airlines (with FastGood) • Careful not to dilute the El Bulli brand 18 Is the internal R&D department an antiquated concept? • • • • No – open innovation can leverage internal R&D But….. New focus: must look outside as well as inside New role: connecting to and collaborating with the outside • New skill: integrating internal and external together 19 Challenges facing SMEs • • • • Less internal R&D capability Less ability to absorb external R&D Less “status” as a partner for others Less market power, weaker ability to capture value • Less IP (usually, not always) • IP Enforcement often too expensive © 2008 Henry Chesbrough 20 Advantages of Small Companies • Size: markets that are too small for large firms can be attractive • Focus: greater ability to execute for a specific segment or set of customer needs • Specialization: ability to develop deep knowledge of a specific domain • Entrepreneurial: external focus on results, much less internal “politics” • Speed: faster decisions, faster execution, faster results © 2008 Henry Chesbrough 21 Open Innovation Benefits for SMEs • Large firms increasingly value collaborative partnerships • Large firms create platforms that seek supporting investments from SMEs • Users (customers) initiate more innovative activity, a big opportunity for SMEs • SMEs can expand geographically now at lower cost, “hidden champions” • Greater rewards to specialization in Open Innovation © 2008 Henry Chesbrough 22 large small Scale of R&D Where does your business fit? Specialist Dominant Niche Breakout small © 2008 Henry Chesbrough large Market Size 23 Winning in the Niche • Build advantage in a small market – Be highly competent in design, or focus, or customization, or customer satisfaction – But don’t overinvest, right-size the investment • Move fast – Develop new products to keep others out • Or at least behind © 2008 Henry Chesbrough 24 Risks in the Niche • Obsolescence – Sticking too long with same offering • Integration with customer – Can customer go around you? • Weak or no effective protection for your IP – You invest, others benefit • What if niche grows too large? © 2008 Henry Chesbrough 25 Winning in the Breakout Business • Here, small R&D investments generate surprisingly large market opportunities • SME has the opportunity to breakout as well • Can you create a platform for others to build upon? (TomTom, MTV, American Idol) • Can you encourage other firms to innovate with you? (Red Bull, and extreme promo’s) • A key skill: thinking like an architect, or a systems integrator © 2008 Henry Chesbrough 26 Risks in the Breakout Business • • • • Many businesses don’t scale up well Large competitors jump in Partners become competitors Systems integrator loses control of the platform © 2008 Henry Chesbrough 27 Winning as a Specialist • High R&D investment to serve a small market • Economics require specialization, and ability to serve whole market – Not enough volume for multiple competitors • An attractive area to partner with a large firm – Take over one of their unattractive businesses – Example: Multis in Ireland (reverse logistics) • Spinoffs: offload underperforming businesses into companies that can execute them better © 2008 Henry Chesbrough 28 Risks of Specialists • • • • Obsolescence Departing employees Management Changes at Key Customers Market Shift Away from the Specialty – Travel agencies after the Internet © 2008 Henry Chesbrough 29 Winning in Dominant Businesses • The Land of the Giants: High R&D costs, large markets • Many niche opportunities to complement Dominant businesses for SMEs • Speeding up Dominant Business’s time to market • Partnering with Large Business: “Only way to become a big company is to learn how to work with big companies” - Intel © 2008 Henry Chesbrough 30 Risks in Dominant Businesses • Getting squeezed by your customer • Sustaining collaboration over time • Being acquired by the Dominant partner – “spin in’s” – How to value fairly such spin-in’s? • Large firm may lack processes to work effectively with small companies © 2008 Henry Chesbrough 31 Conclusion • Being an SME is tough – But being a large company can be tough too • SMEs are not “one size fits all” – Assess where your business fits, Scale of R&D vs. Market Size • How can you adapt your business model to improve your business’s fit? • Can groups of SMEs organize to create breakout businesses? © 2008 Henry Chesbrough 32 The Crisis in Copenhagen • Successor to Kyoto protocol • Disputes over emissions targets…. • …. and over access to the IP and technology to achieve them! • Proposals of $100 billion + are ill-suited to the times • Can Open Innovation help? Founding Partner resources: - brand development (Nike) - legal architecture (Science Commons) - technical implementation (Force.com) - technical implementation (nGenera) - technical implementation (2degrees) - messaging and story (IDEO) - academic outreach (U Washington) - business rationale for sharing (UC Berkeley) sustainability patents • greentech / sustainability patents represent a small portion of the overall portfolio of the average company. • and most companies have little skill or experience in licensing or sharing them Businesses Control the Use of Their Green IP • retain the essential rights inside the core business • use a standard offer to license the rights via automated transactions • determine exceptions to licensing requirements – research – geography – field of use – etc…. The Business Benefits of Sharing or Exchanging Green IP Publicity, yes, but there’s much more … Greater usage of technology to lower costs Commoditize an input to lower costs Establish a technical standard to influence the future development path • Incremental revenues from licensing outside of your business • Stimulate greater research activity in areas of value to your business • • • • Open Innovation in Copenhagen? • Private reasons to share or exchange Green IP – Good business, not just good publicity • No government action required – Though policy can help stimulate the process… • Developing nations need not pay for all IP rights – Exchange, share, or license just those they need • Developing nations innovate too – And these can be shared with other developing countries Policy Can Help! • Provide greater information on available green technologies, whether private or publicly held • Offer financial assistance for licensing useful Green IP to developing countries – Also technical assistance • Award prizes for most useful Green IP • Provide tax incentives to stimulate sharing or exchange of Green IP 42 Photo Credits Flickr: Chess/Fox, Tuesday Night Poker/Rambis, Ryan Air/ezreenphotography, Ryan Air New Boeing 787 Colours/macrodebs, 332/265/Digg Pirate, The bus shelter at the edge of the ocean/goddess_spiral, Flickr treo ad/Steve Rhodes, Technology - "Future Vision“/$ydney iStockphoto: 000003004014, 000003062424, 000004293861, 000007135639, 000005589058, 000000718722 iPod photo: http://www.apple.com/ipodclassic/ 43